Stock Purchases: GD, CVX, AAPL

I freed up some more cash in my Dividend Retirement Portfolio recently so it was time to go shopping. My goal for this portfolio is to accumulate quality dividend growth stocks that will one day provide income for my retirement (about this portfolio). I’m off to a great start – picking up shares in 7 different companies representing 7 different sectors over the past two weeks. Today I had enough funds ($10k) to add another 3 stocks to the portfolio and I decided to initiate positions in Apple (AAPL), General Dynamics (GD) and Chevron (CVX).

4/28/2015 – Apple (AAPL)

• Shares purchased: 23
• Cost per share: $132.94
• Commissions: $14.95
• Cost basis: $3072.57
• Yield: 1.56%
• Expected annual income: $47.84

I used to trade AAPL on a weekly basis as an options trader, and my love affair with the stock (and company) is still strong as ever now that I’m a dividend growth investor. In a previous post I mentioned that my first ever dividend growth stock purchase in my Dividend Empire Portfolio was Apple. As I mentioned in that post, I understand that AAPL is not a common pick for dividend growth investors and I understand their reasoning. However, I believe that this is a great opportunity to get in on a dividend grower when it is just starting to pay out and increase their dividends.

Apple Performance

Apple certainly does not need a big introduction, so I’ll be brief. Their revenue growth has been unbelievable over the past 10 years:

AAPL data by GuruFocus.com

 

And based on their recent earnings report I see this trend continuing. AAPL posted a 27.5% year-over-year increase in revenue and a 30% y/y increase in operating income. They recently increased their capital return by 50% to $200 billion through March 2017. The AAPL dividend was increased to $0.52/sh (10.6% increase) and their share repurchase budget was increased to $140 billion. They have an expected 2015 PE ratio of 14.97 compared to 20.5 for the industry and a very attractive PEG ratio of 1.07. Finally, one message that really stood out to me in the recent earnings was a 34.9% increase in R&D spending. Commitment to R&D = new technologies = future growth.

Of the 32 analysts tracking Apple, 19 are recommending strong buy, 3 say buy and 10 say hold with a 145 consensus target price. But I feel the stock is even more undervalued than that. Using a discounted cash flow analysis (EPS 8.09, 10yr growth @ 18%, 12% discount) I get a fair value estimate of $201.77. There seems to be plenty of upside to this stock right now.

AAPL Dividend Performance & Outlook

So, yes, they are a fabulous company. But what about the dividend growth part? AAPL started paying a dividend back in 2012 so they are just getting started. Over the last 3 years the AAPL dividend has been increased by 15%, 7.8% and most recently 10.6%. I know this is a small sample size but assuming AAPL can continue increasing the dividend by 10% annually (more on this later) the dividend will be about $3.35/sh in 5 years. This would give me a 2.5% yield on cost – very respectable. But will Apple be able to continue this dividend growth rate? Well they have a TON of cash on hand and their free cash flow is growing at a rapid pace:

AAPL data by GuruFocus.com

 

They also have a payout ratio of just 25% so it really looks like we are just getting started. I believe the AAPL dividend will continue to grow and AAPL will soon be a core position in many dividend growth portfolios.

4/28/2015 – General Dynamics Corporation (GD)

• Sector: Industrials
• Industry: Aerospace/Defense
• Shares purchased: 23
• Cost per share: $132.97
• Commissions: $14.95
• Cost basis: $3073.26
• Yield: 2.07%
• Expected annual income: $63.48

General Dynamics is a market leader in business aviation; combat vehicles, weapons systems and munitions; shipbuilding; and communication and information technology systems and solutions. The company is organized into four business groups: Aerospace, Combat Systems, Information Systems and Technology and Marine Systems. 2014 was a record setting year for GD. Their operating earnings, margins, free cash flow, earnings from continuing operations and earnings per share in 2014 were the highest in the company’s history, and they look poised to continue their phenomenal growth.

General Dynamics looks very attractive relative to it’s peers in the Aerospace/Defense industry. GD is expecting 6.5% earnings growth compared to -3.8% for the industry. The 2015 PE ratio is just 15.92 compared to 17.1 for the industry. There are currently 13 analysts covering GD – 9 strong buys, 1 buy and 3 holds with a $160 consensus target price. As a bonus, GD has had 7 straight positive earnings surprises (next earnings 4/29/2015).

GD has increased their dividend for 24 consecutive years so they are clearly committed to dividend growth. Although my yield on cost for GD is somewhat low (2.07%), they have shown excellent dividend growth in the past 5 years (8.4%). If the dividend continues to grow at this pace I can expect a 2.84% yield on cost in 5 years. And with a FCF payout ratio of just 26% this seems feasible.

4/28/2015 – Chevron (CVX)

• Sector: Energy
• Industry: Major Integrated Oil & Gas
• Shares purchased: 27
• Cost per share: $110.09
• Commissions: $14.95
• Cost basis: $2987.38
• Yield: 3.87%
• Expected annual income: $115.56

Last but not least, I purchased 27 shares of Chevron (CVX). Another stock that needs no introduction. I won’t go into too much detail here since most of the reasons for adding CVX to my portfolio are summarized nicely in an article by The Value Portfolio on SeekingAlpha titled Chevron Is A Wonderful Long-Term Investment. I’ll just provide some basic dividend and valuation info here.

CVX has consistently increased their dividend for 27 consecutive years. This seems to be a opportune time to establish a position in CVX as the dividend yield is near 5-year highs:

One other important point to make about CVX is their ability to pay out and even increase their dividends through tough times. This graph shows continuous dividend increases even during the years when earnings per share dropped significantly:

Finally, a discounted cash flow analysis on CVX (EPS=10.13, 10yr growth=6.5%, 12% discount rate) results in a fair value estimate of $119.26, so I feel like I got a good deal on these shares.

Portfolio Impact

These 3 additions to my portfolio helped me diversify by establishing positions in 2 previously vacant sectors: Industrials and Energy. My portfolio yield on cost dropped from 3.49% to 3.18% due to the low yields of AAPL and GD, but I believe the yield on cost for these positions will grow quickly over the next few years. Finally, my projected annual income increased $226.88 to a total of $957.80 with these purchases.

Any thoughts on these companies? I’m curious to see how others feel about owning AAPL in a dividend growth portfolio.

Disclosure: Long AAPL, GD, CVX